Commodities futures driven by price moves, not news, study finds

Commodity-future price moves rather than news are increasingly driving trade in oil, sugar and grain futures, which may make finding a fair price less efficient, according to a Swiss study.

Since the middle of the 2000s, more than one out of two price changes in a number of commodity markets followed from an earlier price move, according to the study by Vladimir Filimonov and Didier Sornette at ETH Zurich and David Bicchetti and Nicolas Maystre at the Geneva-based United Nations Conference on Trade and Development.

The researchers analyzed intraday trading of oil and sugar in New York and London and corn, soybeans and wheat in Chicago, finding “high levels” of self-generated price moves.

“Price dynamics on these commodity markets are partly driven by self-reinforcing mechanisms,” the researchers wrote in the study published March 20 via the Social Science Research Network. “This evolution partly reflects the development of algorithmic trading and of high-frequency trading in particular.”

The European Parliament backed a proposal to limit high- frequency trading by introducing a 500 millisecond minimum holding period for any trade in October. A study by Bicchetti and Maystre published last year found an increase in high- frequency trading in commodities is boosting the short-term correlation with the prices of stocks and other assets.

Market orders based on technical analysis, herd behavior, margin calls on leveraged trades and stop-loss orders are among the mechanisms that can trigger so-called endogeneity, or price moves not generated by external information, Filimonov, Bicchetti, Maystre and Sornette said.

Trading Activity

A cascade of self-generated trading activity makes finding a “true price” take longer, a potential source of inefficiency or instability in the process of price discovery, according to the study.

“Rather than agreeing rapidly on the correct price after the arrival of some unanticipated news, the traders trade longer and longer,” not knowing on what price to settle, the researchers wrote.

The study indicated typically 60% to 70% of commodity price changes are driven by preceding price moves rather than new information, with the percentage rising since the mid-2000s through to October 2012.